Definition

The term against the box refers to the practice of selling short securities that are held in safekeeping or owned. Selling short against the box provided investors with a mechanism to defer paying federal income tax on a capital gain.

Explanation

When an investor sells short equities they own, this is referred to as selling short against the box. (At one time, this phrase implied the stock certificates were held in a safe deposit box.) By doing so, the investor establishes a neutral position in the security. This means their profit is now fixed. The investor has agreed to sell their shares at a certain price. Gains or losses on the short sale will be exactly offset by the loss or gain on the market price of the security they own.

Prior to 1997, selling short against the box would allow an investor to delay taking a capital gain in a given calendar year. A taxpayer might want to do this if the capital gain will trigger a federal income tax withholding penalty or to offset a capital loss they expect to take in the following calendar year. The Taxpayer Relief Act of 1997 closed this loophole. Under the current law, selling short against the box will no longer defer the payment of income taxes on a capital gain.